By David Parrish
The housing inventory is low. What is low? Lower than demand, low enough that buyers are becoming frustrated. So low that there are competing offers on the same home and the calls for highest and best offers are commonplace in today’s market.
A common question from many clients has been: Why?
There’s no single factor that’s causing this shortage. It’s instead a mix of many factors, none of which look likely to change in the near term.
Economic recovery: Yes, there’s an economic recovery that’s been going on for several years. That recovery is real, although not universal. Things are improving, employment numbers are up, overall confidence in the economy is up. The general feeling that real estate is a sound investment is again the norm.
Continued low interest rates: The FED, as they are lovingly referred, has kept money rates to banks at near zero, resulting in near record low interest rates. At this writing the national average interest rate being quoted for a 30-year fixed mortgage is below 4 percent. These low interest rates and knowledge that these won’t last a lot longer are fueling buyer activity. If interest rates rise 1 percent, that’s equivalent to a 20 percent increase in a home’s price for a financed sale. The vast majority of sales are financed sales.
Increase in existing home sales: Fueled by a renewed confidence in the economy and continued low interest rates, there’s an increasing interest in homeownership. Demand for homes has improved dramatically. This is especially true for homes priced below $250,000. Remember this number is for the local market but is the rule for Birmingham and surrounding areas. This number may be different if you’re thinking about another market area. The largest increase in home buyers is by far first time home buyers and first time move up buyers.
Low number of new housing starts: New housing starts are on the increase and have been for almost 18 months at this writing; however, they remain at a below normal rate. The number of active homebuilders is at the lowest rate in decades. Lot inventories (number of already developed buildable lots) is at the lowest point for more than 20 years.
Reduction of foreclosure inventory: Foreclosure rates are down to almost normal rates for most of the nation. Yes, foreclosures are still occurring, but they’re having much less impact on the general real estate market than they have for almost eight years.
Many homeowners remain underwater: Despite all the positive news in the general economy and in the real estate market, it will take some additional time for many of the homeowners that purchased or refinanced between 2004 and 2010 to make up for the losses in home value caused by the Great Recession. A 20 percent loss in value takes a while to overcome when appreciation rates are running at 4 percent. Selling before those losses in value are recovered or equity can be built means selling at a loss and perhaps even bringing money to the table at closing. So, unless there are some pretty strong motivating factors, many homeowners who would love to sell are still on the sidelines waiting to be in a better position.
Fear of rising prices and interest rates: Fear is a significant motivator. For much of the past six years buyers have held back on purchasing, waiting on even lower prices and lower interest rates. With the reality that the bottom is now significantly past, buyers are now acting out of fear that prices will start to increase. They have begun their climb just as building costs have increased. Only the most truly uninformed buyer believes that the record low interest rates will remain with us much longer.
Millennials entering the market: Talk about pent-up demand. The under-40 crowd is ready to get it on. Having lived most of their adult life in one or another form of disaster, they’re finally seeing some light at the end of the tunnel, some hope for the future. Ready to move out of the parents’ basement or that cramped apartment, they’re entering the home market with a vengeance while not quite the overwhelming force that my generation (Baby Boomers) was, they’re a force to be reckoned with.
So, is the glass half empty or half full? Yes, home inventories are low and prices are rising. Good news or bad news? I’ll let you be the judge. For me, I’m happy to see the return of the American Dream.
May the market be with you.